Substantial Compliance Returns for the Charitable Contribution of Real Property

pni0802clayexploreIn a division opinion, the U.S. Tax Court reestablished the prospect of substantial compliance for taxpayers who claim charitable contribution deductions that require an appraisal. Three partners in a LLC sold property to Arizona’s Maricopa Flood Control District (you may have heard of Maricopa here) for less than fair market value. After obtaining two separate appraisals, the taxpayers claimed a charitable contribution on the difference between the lesser of the two valuations and the sale price.

The IRS disallowed the deductions on the grounds that: the appraiser was not qualified; there was not a detailed description of the property; there was no statement that the appraisal was for income tax purposes; the valuation date was not the date of the contribution; and the appraisers’ definition of fair market value did not match that of the regulations. The IRS also argued that the value of the property was less than the sales price.

The government lost on every count. The court rejected the IRS’s nit pick approach to each of the appraisal documentation requirements – including the government’s argument that the Form 8283 did not include the signatures of both appraisers even though the form only has one signature line for an appraiser. The Court found that the difference of 11 to 21 days between the valuation date and the contribution date should not matter without “any significant event that would obviously affect the value of the property.” The Court also found that there are no magic words to fulfill the requirement that the appraisal state that it is for income tax purposes and the inclusion of the statement “for filing with the IRS” with the appraisal constituted substantial compliance with the regulation. With regard to each alleged violation of the charitable contribution regulations, the Court found that the taxpayers’ were in substantial compliance.

Finally, the Court rejected the valuation by the government’s expert which was based on “unreasonable assumptions” and adopted the appraisal presented by the taxpayers’ expert at trial (which was more than claimed on the original returns).

Read the opinion here: Cave Buttes, LLC v. Commissioner

Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

We’ve covered developments in the litigation of conversation and facade easement cases here for some time now.  We’ve recently taken that experience, added a little historical perspective, and put it together for an article in the Federal Lawyer.  (Yes, we mention the Beatles too).

Check it out here:  Understanding the Conservation Easement Tax Deduction (or Strawberry Fields Forever)

Value Matters, Even as Tax Court Denies Conservation Easement Deduction

Autosave-File vom d-lab2/3 der AgfaPhoto GmbHAlthough disappointing to the petitioning taxpayer, yesterday’s Tax Court opinion in Mountanos v. Commissioner is of some relief to practitioners and counsel who follow conservation easement cases closely. Recent decisions in the Tax Court (Belk, Averyt) and the Courts of Appeals (Kaufman, Scheidelman) have turned on technical aspects of the Treasury regulations that govern the deductibility of these charitable contributions.

Mountanos, instead, is a “traditional” conservation easement case in that the validity of the donation, documentation and recordation of the easement were not at issue. We note, however, that the government did argue that the taxpayers did not acquire a “contemporaneous written acknowledgment” from the donee organization or a “qualified appraisal” as required under the applicable statute and regulations but the court did not address these arguments.

Rather this case turned entirely on the value attributed to the taxpayer’s donation of an 882 acre tract of undeveloped land in north central California. The taxpayer’s valuation was based on the before and after approach. Using that method, where the “before” value is based on the highest and best use of the property, the taxpayer’s $4.6 million valuation was based on use of the property as part vineyard and part residential development. The “after” valuation – that is, after the restrictive easement was imposed – was based entirely on recreational use (such as deer hunting).

Judge Kroupa was not persuaded that a 287 acre vineyard “was a legally permissible, physically possible and economically feasible use of the ranch.” The taxpayer’s restricted access to the property (across Federally controlled parkland) and lack of access to proper irrigation made the likelihood of a viable vineyard slim, even if it could have been economically viable (which the court found equally unlikely).

The proposed use of the property for residential development was no more impressive to the court. The entire parcel was subject to a contract with the county, governed by a state statute (the Williamson Act), that forbade residential development – even before the conservation easement donation had been made. The taxpayers did not put on evidence to convince the court that the state law restrictions would not apply if the taxpayer indeed tried to pursue residential development. Accordingly, the court concluded that the taxpayers failed to show that “the conservation easement had any value.”

The court also sustained the 40% gross valuation overstatement penalty asserted against the taxpayers. It is unclear whether the taxpayers put forth a reasonable cause defense to the penalty or not but the court noted that such a defense does not apply “in the case of a gross valuation overstatement with respect to property for which a charitable contribution deduction was claimed under section 170. Sec. 6664(c)(3).”

This was unquestionably a bad result for the taxpayers but still an encouraging note for taxpayers who have made carefully executed and fairly valued conservation or facade easements – you should at least have a day in court.

Read the opinion here:
Mountanos v. Commissioner, TC Memo 2013-138

New York Times: Lauder Family Artfully Shelters Taxes

David Kocieniewski, a leading tax reporter for the New York Times, reports that Ronald S. Lauder and his family, heirs to the Estée Laduer fortune, employ a variety of strategies available only to the rich to reduce their tax liability. The article is interesting for covering certain high net worth strategies that have been investigated by the Internal Revenue Service in recent years, but I’m not sure if Mr. Kocieniewski doesn’t overreach a little bit in his discussion of Mr. Lauder’s father’s valuation case in the United States Tax Court. Mr. Kocieniewski writes:

“When Mr. Lauder’s father, Joseph, died in 1983, family members fought the I.R.S. for more than a decade to reduce their estate tax. The dispute involved a block of shares bequeathed to the family — the estate valued it at $29 million, while the I.R.S. placed it at $89.5 million. A panel of judges ultimately decided on $50 million, a decision that saved the estate more than $20 million in taxes.”

Presumably Mr. Kocieniewski is referring to Estate of Lauder v. Commissioner, T.C. Memo 1994-527 which was the third of three memorandum opinions written by Judge Hamblen on behalf of the Tax Court with regard to the Lauder case. It was this third opinion that focused on the valuation of Mr. Lauder’s estate.

Here’s the bone. The entire case, all three opinions, was about the proper valuation of Mr. Lauder’s estate. However, Mr. Kocieniewski writes that because Judge Hamblen determined the proper valuation of the estate was less than the IRS asserted the litigation “saved the estate more than $20 million in taxes.” Isn’t also possible that the IRS valuation was inflated, inaccurate or maybe simply incorrect? (It seems that Judge Hamblen felt as much.) In which case, Mr. Lauder’s estate didn’t “save” any taxes at all but rather paid the proper tax due.

Certainly valuation cases are complicated, and there were several procedural and substantive issues addressed in the Lauder litigation, but the implication that anyone who prevails in the face of a tax liability incorrectly asserted by the IRS is “saving” taxes seems a bit much.  Unfortunately, we cannot share the text of the Lauder estate opinions here without violating a copyright but if you have the tools to investigate them yourself the citations are: Estate of Lauder v. Commissioner, T.C. Memo 1992-736; Estate of Lauder v. Commissioner, T.C. Memo 1992-736; and the above-mentioned Estate of Lauder v. Commissioner, T.C. Memo 1994-527.

If you would like to read Mr. Kocieniewski’s article you can find it here.

Finally, a post script to Mr. Sheldon Cohen, whose comments in the article about the social value of certain tax benefits for benefactors of the arts are well taken.